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In the fixed income markets, there are a variety of
instruments that, rather than paying interest as
coupons, pay it at
maturity. They are issued at some price and later mature for a
greater value. This article focuses on short-term, money market forms of
these instruments. See the article zero-coupon bonds for the longer-term forms.
The instruments fall into two categories.
 The first
category might be called accrual
instruments. These instruments are issued at some
face value and mature for a value equal to that face value plus interest.
The
second category is discount
instruments. These have a face value that represents their maturity value.
They are issued at a discount from that face value.
This distinction is illustrated in Exhibit 1.
Accrual instruments are quoted as
yields. Discount instruments can be
quoted on a price or yield basis. Yields are calculated differently for
the two types of instruments, so a yield quoted for one is not comparable
to a yield quoted for the other.
Yields for accrual instruments are quoted as
simple interest rates. Yields
for discount instruments are quoted as
discount yields. If comparisons with other instruments' yields need to be made,
a discount instrument's yield may be converted to
bond-equivalent
yields.
In the money market, examples of accrual instruments
include
Eurodollar
deposits,
certificates
of deposit
fed
funds, and
repos
Discount instruments include
T-bills,
commercial
paper, and
bankers
acceptances.
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 bankers acceptance
An acceptance that has a bank as its drawee.
bond-equivalent
yield A convention for converting discount yields to a form
more comparable to bond yields.
commercial paper
Short-term promissory notes issued primarily by corporations.
compound interest
Any of several methods of crediting interest in which interest is earned on interest.
discount
yield A formula for calculating yield on a discount instrument.
Eurodollar
deposit
A deposit of US dollars held at a bank branch outside the United
States.
Fed funds Deposits
held by US banks in accounts at their regional Federal Reserve banks.
fixed income
term structure Refers collectively to a spot curve, forward curve,
discount curve, yield curve or any other curve that describes the time value of
money.
Libor
London Interbank Offered Rate.
par value A stated
value for a security.
repurchase
agreement An agreement to sell and
subsequently repurchase a security.
Treasury bill US
Treasury security with with a maturity of a year or less at the time of issue.
yield
Any of several metrics of the income or return to be earned from an investment. |
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